BOJ to expedite new liquidity test for banks

Bank of Jamaica, BOJ, will issue new guidelines for liquidity management in the banking system, one that involves a new stress test.

The central bank noted in its newly released annual report that elements of both the Basel II and III capital frameworks will be implemented over the next two to three years, but that the Basel III Liquidity Coverage Ratio or LCR will be expedited for full implementation during 2019.

The LCR measures a deposit-taking institution’s or DTI’s ability to withstand a liquidity stress test lasting 30 days. It assesses the amount of unencumbered high-quality liquid assets or HQLAs that a bank holds to meet short-term obligations, the report states.

High-quality assets include cash, government securities, central bank deposits and qualifying corporate debt. Those holdings should be greater than or equal to the bank’s net cash outflows over the 30-day stress period.

The BOJ said it will issue guidelines, which will set out the best practice standards for liquidity management for deposit-taking institutions.

“In order to inform the calibration of the methodology for computing the LCR, a quantitative impact study will be conducted in the first quarter of 2019 to assess the adequacy of DTIs’ HQLA to cover 30-day foreign currency net cash outflows obligations as per the Basel standards,” the central bank noted.

Industry members reached for comment said they were aware that the LCR was being expedited, but it was too early to give feedback on the measure, as, one banker said, “the parameters that are to be applied to the industry have not yet been defined”.

As for other stress tests conducted by the central bank last year, BOJ said the one for capital adequacy showed the banking sector remained “relatively buoyant”, and that it would take a reduction of 61 per cent in deposits for the capital adequacy ratio to fall below the statutory benchmark of 10 per cent.

However, BOJ also reported that one of the 11 deposit-takers was found to be vulnerable at the stress level of a 50 per cent reduction in deposits. The central bank does not identify the operators on which it reports by name.

The central bank similarly determined that the banks stood resiliently against foreign exchange risk last year, but one deposit taker was found to be impacted by a hypothetical 50 per cent appreciation in the exchange rate, in the test carried out last September.

“The negative impact on the institution’s CAR [capital adequacy ratio] was due to the magnitude of its foreign currency long position,” BOJ said in its annual report.

The interest rate stress tests also found the sector to be resilient, as their buffer capital was sufficient to absorb the impact of contemplated shocks and were above the prudential minimum benchmark.

The term DTI is a broad classification for different types of banks, inclusive of commercial banks, mortgage banks or building societies, and merchant banks.